Income from a Child’s Investment

It is a generous act for a parent or aunt or uncle to start a savings account for their kids or a new addition to the next generation. It is uncommon among the warm and generous emotions that accompany giving such a gift to the newly arrived family member, to factor in the taxation obligations that may eventually come along due to this generosity.

A young child may not be able to use the ATM or see over the counter at the bank, but they can certainly have bank accounts. Naturally it is a child’s guardian who will manage their financial matters, and therefore a parent may operate a savings account on behalf of a child.

For taxation however, while the account may be in the child’s name and the funds in that account are the property of that child, the underlying legal principle that prevails is that investment income (in this case, the bank account’s interest) is assessable to the person who beneficially owns the money (and not necessarily who legally owns it).

The tax rules in operation here are not limited to children’s saving accounts, but it is a scenario that is useful in describing the principles at work. In fact, the Taxation Commissioner has recently issued a Tax Determination (TD 2017/11) that consolidates previous rulings and determinations in relation to not just children’s savings accounts but also monetary gifts to a child, joint bank accounts, and joint signatories to a bank account.

In each situation, it has been determined that interest income on a bank account is assessable to the person or persons who beneficially own the money in the account.

Tax rates for minors

The ATO and other government agencies determine a “minor” to be those under the age of 18.

For minors, the tax free threshold is a mere $416. Between $417 and $1,307 the rate is set at 68% (66% after June 30, 2017, when the Temporary Budget Repair levy expires). After $1,308, the top (adult) marginal rate applies.

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